Agreeing a fair share; Shareholders’ Agreements
Author: by Catriona Wheeler, partner, Andrew & Co LLP, Lincs
Last Updated: 11/10/2011 12:23:45 PM
Summary
How many people own shares in your company? If it’s more than one, have you thought about what happens if one of you wants to leave, or dies, or if you don’t agree on the direction your business should take? All too often it is only when these issues come up that owner-managers realise that it would have been useful to think of them earlier and cover them in a shareholders’ agreement.
Article
Shareholders' agreements are useful arrangements that can be
tailored to suit the needs of each individual company.
Many do not realise that simply because they own more shares
than the other shareholders this does not give them the right to
out vote the others at board meetings. An agreement could say that
there are certain decisions which may only be taken with the
agreement of a particular shareholder. Or it could say that there
are decisions which can only be taken with the agreement of them
all, instead of the majority of the directors. These could be
whatever is identified as being important to the shareholders when
the agreement is drafted and could include matters such as large
capital outlays, hiring senior staff or disposing of the
business.
In a company in which no one person has a majority of the shares
there is still always a risk that two or more shareholders might
act together to form a majority which could appoint or remove
directors. It is usually advisable that each shareholder has a
right to appoint themselves as a director. This right can be given
in the articles of association or in an agreement.
Some companies have a straightforward 50/50 split so that the
two shareholders are the only directors. If those two have a
disagreement as to how the company's future is best served they
might end in deadlock with the board unable to proceed to decisions
either way. In that case a shareholders' agreement can assist,
often by providing a procedure to allow for discussion and
resolution, but if that is unsuccessful it can allow an exit
strategy. These exit strategies can have dramatic names such as
Russian Roulette and Mexican standoff, but their purpose is
ultimately to allow the company to survive with one shareholder
taking it forward and the other receiving a fair value for his
share of the business.
Shareholders do not always wish to continue in business together
indefinitely. Most standard articles of association do not allow
for exit strategies with the result that a shareholder can be
trapped in the company with no way of realising his investment. An
agreement can allow for a system of a fair value being set for the
shares and a procedure for payments which is affordable to all
parties. It would also provide for protection of the company from
that shareholder setting up in completion by putting into place
agreed restrictions on shareholders who leave.
Any company wishing to discuss shareholders' agreements can
contact Andrew & Co LLP on either 01636 673743 or 01522
512123.
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